What is an ESOP in a startup?

A plan that reserves part of the company's shares to grant employees options, which are the right to buy shares later at a fixed price.

What is a vesting cliff?

A period, often one year, before any options vest. If the employee leaves before the cliff, they get nothing. After it, a portion vests at once.

How big should an option pool be?

Large enough for your hiring plan over the next 18 to 24 months. Pools of roughly 10% to 20% are common, but size it to your real plans.

Employee Stock Option Plan (ESOP): How Startup Equity Works

An employee stock option plan (ESOP) sets aside a share of a startup's equity, called the option pool, to grant employees the right to buy shares later at a fixed price. If the company's value grows, those options can become valuable, which helps startups attract people they cannot yet pay market salaries.

By Javier Alonso, Founder & CEO. Updated 2026-10-25.

How stock options work

The company creates an option pool, a percentage of its shares reserved for employees.
An employee receives a grant: a number of options at a fixed exercise price (also called strike price), usually the shares' fair value at the time.
The options vest over time, meaning the employee earns the right to them gradually.
The employee can exercise vested options by paying the exercise price to get shares.
The shares become valuable to sell if the company is acquired or goes public at a higher value.

Vesting and the cliff

A common startup schedule is four years of vesting with a one-year cliff: nothing vests in the first year, then 25% vests at the one-year mark and the rest vests monthly or quarterly over the following three years. The cliff protects the company if someone leaves early. Founders often have vesting on their own shares too, for the same reason.

Option pool size

Investors often ask for a pool to be created or enlarged before a priced round, commonly somewhere around 10% to 20% of the company, so that future hires do not dilute them. Size the pool to your actual hiring plan for the next 18 to 24 months rather than a default number, because a larger pool dilutes the founders.

A note on the name

In the United States, "ESOP" usually means an employee stock ownership plan, a retirement trust that holds company shares for employees, which is different from startup stock options. In many other countries, ESOP commonly refers to employee stock option plans like the one described here. Check which one a document means.

Taxes and rules

How options are taxed, and which types exist, varies a lot by country. Some jurisdictions have special schemes for startups with better tax treatment. Get advice from a lawyer or accountant in your country before setting up a plan.

For your role

Founders: Explain options clearly when hiring: the number of options, the exercise price, the vesting schedule and the percentage of the company they represent.
Investors: Agreeing on the option pool before the round avoids surprises in the cap table after closing.

Primary sources

Rewarding Talent — Index Ventures

Common questions

What is an ESOP in a startup?: A plan that reserves part of the company's shares to grant employees options, which are the right to buy shares later at a fixed price.
What is a vesting cliff?: A period, often one year, before any options vest. If the employee leaves before the cliff, they get nothing. After it, a portion vests at once.
How big should an option pool be?: Large enough for your hiring plan over the next 18 to 24 months. Pools of roughly 10% to 20% are common, but size it to your real plans.